Ok, I am now taunting your creativity; imagine an investment where you can withdraw money up to the amount of your initial investment without paying taxes. And I will continue to push the limit: imagine that this investment will only trigger capital gains instead of interest and dividend income!

Now you can open your eyes again and read the rest of this post. Unless you want to take down your financial advisor’s phone number to call him right after this read because such investment exists. It is called Corporate Class Funds.

How does this work?

Corporate class funds can be viewed as a big bag with several mutual funds. You have the possibility to select the funds you want according to your investment profile. You are also able to switch funds in the same family (same bag) without triggering capital gains.

When you withdraw money from the bag, you are first deemed to take back your capital. This option is called ROC (Return of Capital). This allows an individual to withdraw all his capital first and therefore report taxes in the future. One of the basics of tax planning is deferring taxes as far as you can.

Once you have taken all your capital, you are left with the investment growth. Regardless if it was created through capital gains, dividend or interest income, it will become capital gains when you take them out of the bag.

Where is the catch?

Honestly, I didn’t find it yet. In fact, Corporate Class Funds have higher MER’s than regular funds. They are usually about 0.30% more expensive than a regular mutual fund for the same category. They are also not sold by banks either (unless you are dealing with a broker). In fact, I really don’t know why they are not really promoted in our industry. I guess the market is just not ready to answer their clients as of to why they didn’t sell such product in the first place!

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As it is the case with the Klondyke, linked notes may seem delicious during the first lick but it hides trans fat and a thousand of calories. This is the price to pay to have performing guaranteed investments .

How does it work for the client?

The client purchases the note and the amount is frozen for a 5 to 8 years term. The note is linked to a predetermined asset (i.e. TSX index or a basket of international stocks). At the end of the term, the client is 100% assured to get his capital back, plus the investment return of the asset, minus management fees. At mid term, the bank usually has a clause allowing the financial institution to buy back the notes (if the underlying asset outperforms their prediction). If they do so, they have to pay a predetermined return to the client (let say 9-10% per year).

How does it work for the bank?

In order to cover their risk, they take about 60% to 70% of the money and invest it in fixed income at a 5% to 6% rate. In 8 years, this amount will give enough to pay back the client’s capital. The other part (the 30% to 40% of the amount) is invested in the market (without management fees since they manage the money for themselves). So if the underlying asset does 11%, they make the 11% and take off about 3% in management from the client. This is the price to pay for having capital guaranteed investment doubled with unlimited potential of return. If the asset did more than 9% at mid term, they simply buy back the note from the client and take the difference from themselves. If investments (both on the fixed income side and the market side) are done carefully, this could be a very profitable business for both the client and the bank.

So is it an evil product or not?

Depending on the type of investor you are, linked notes maybe represent your only chance to beat the 3.5% GIC rates without taking risks or it could result in a total waste of potential return. In theory, if you invest 70% of your investment into fixed income and invest the difference in the asset yourself, chances are that you will make as much or more than the linked note. However, if you can’t stand fluctuation, you will probably choke after 6 months of bear market, sell everything and then, cry that you didn’t make money with the stock market. If it’s your case, then, the linked note is a really good investment for your portfolio. If you are able to take market fluctuations without losing your sleep, then, linked notes are totally useless.

Nothing is black or white in the world of investment…

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Well banks and other financial institutions improve what used to be a simple line of credit backed by a property into the most flexible mortgage product you can ever see! In this post, I go over several improvements on this innovative way to finance a house.

Create of more than one account

This happened a few years ago, you now have the possibility to split your line of credit into smaller but separate flex lines. While the total of them must always equal less than the authorized amount, you can select variable or fix limits for each of them.

Add a third party user

Even better, you can even add a third party for one of your line of credit. So let say that you want to give you child a 5K flex line in order to manage his tuition fees, you can set a fixed 5k line of credit within your HELOC and add him as a user of this portion only. Therefore, you are able to monitor his college expenses and he doesn’t have access to your whole 300K line of credit!

Include a mortgage within your home equity line of credit

You are too nervous about short term interest rates and you would like to freeze a part of your mortgage at a determined rate for a determined period; you can include it within your line of credit. For example, if you have a global credit limit of 300K and you wish to have a 200K at 5.5% for 5 years, you will sign paperwork for your fixed portion and your HELOC will decrease to 100K. With this option, you will benefit from a good rate on the variable side and you sleep well at night!

Your fixed mortgage can now communicate with your HELOC!

The most recent feature offered with lines of credit backed by a property is that you can increase the limit of your HELOC while you are paying down your fixed or variable rate mortgage. So every penny applied to the capital in a regular mortgage payment can increase your global credit limit. You can then have the possibility to use the equity underlying within your house at anytime without even the permission from the bank! This is obviously perfect for leverage strategies such as the Smith Manoeuvre or simply to manage your personal finance.

With these improvements, the new and re-designed HELOC constitute on of the best mortgage product offered by any financial institutions. I strongly suggest you meet with a financial planner in order to get all the necessary information about a home equity line of credit.

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As mentioned in my previous article related to the mortgage, several products have been created throughout the years by financial institutions in order to meet all kinds of clients’ needs. On of them is the home equity line of credit (HELOC). This huge flex line could be a very interesting product if you master its characteristics. In order to do so, we offer an overview of this financial tool.

Definition

An HELOC is a flex line secured by a property. Financial institutions will grant a line of credit that can go up to 75% of the market value of your residence. In some cases, this amount can go even higher than 75%! The HELOC works the same way as a regular line of credit in term of rate and minimum payment. However, the amount granted is much higher.

Once you are approved, an appraiser will visit your property. He will make two kinds of calculations. One is based on the cost of rebuilding and the other is based on recent sales in the area. He will average both of them and provide the bank with a final value. Once this step is completed, the file is sent for registration and you will then sign the final paperwork.

Needs

The most common need for an HELOC is definitely to finance the purchase of a property. However, this mortgage offers more flexibility than any other types of loans. You can use it for renovation, buying a car, traveling and event to invest on the stock market. Since the granted amount is revolving, you have the option to withdraw up to the limit any time you want. Therefore, you can finance a variety of projects without going back to your banker everything.

Another interesting characteristic of this product is that it can be divided into more than one account. Each account has their number and credit limit. Therefore, you can easily separate your HELOC according to your needs and apply different payment on each payment.

Qualification

In order to qualify for an HELOC, several criterions will be looked at. The first one will be the TDSR. As it gives more flexibility than a regular mortgage, the HELOC requires a debt ratio lower than 40%. The credit rating represents an important factor also. Because an individual might end up with a three hundred thousand flex line, bankers are looking to people that are very diligent with their credit. Liquid assets as stocks and mutual fund can compensate for a higher debt ratio. Finally, the net worth will also play a role as it will show the client’s ability to manager his assets and to have them grow overtime.

Negotiation

Unless you are not approved for the full 75% of your property value, there is nothing much to negotiate. Interest rate will be at prime most of the time. In regards to the appraisal value, banks use accredited appraiser in which they have faith. They might increase the value by another 3% as a bigger increase would represent an unethical act for them.

In conclusion, the HELOC could be use for different projects and can also be included in financial strategies. Even if the flex line is secured, a good credit rating and TDSR will be necessary to qualify for. In the end, the HELOC could be an amazing product but will require self control and maturity in its usage.

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The Biggest purchase of your life will surely be your house. As most individuals can’t afford the full payment, banks created several financial products to fulfill this need. The most common type is called a mortgage. In this section, we will do a quick overview of this kind of credit before we can go deeper in the characteristics.

Definition

The mortgage is an amount of money granted to an individual purchasing a property. This property can be a house, a condo or even a rental property. In order to secure its loan, the financial institution will take a 1sr rank lien on the property. In other words, the lender is legally binding the property to the mortgage. In the event of default, the creditor will obtain legal possession and right of use of your property. You would therefore loose your asset and the bank will pay itself with the sale of the property.

Since mortgages are contracted for significant amount, they have also bigger amortization. Mortgages have a term and an amortization. The term determined the date of renewal. It usually goes from six months to ten years. As previously mentioned in another article, the amortization represents then length of the loan. As we are dealing with more substantial amount than with the personal loan, the amortization is longer. It was recently increased up to forty years depending of the institution and the type of product.

Needs

The most common need for a mortgage is obviously to buy a property. However there are other needs that can be fulfilled by this product. As an example, an individual could apply for a mortgage to purchase another asset. If he has enough equity in his main residence, he can give it as collateral to purchase a second residence, a rental property or even a car. He would definitely get better lending conditions (amortization, rate, flexibility, etc). Another usage is to consolidate debts. Since de loan will be secured, the individual will get a better rate than with a regular consolidation loan.

Qualification

As mortgages are secured loans, it is easier to qualify for. Most banks will look at your TDSR (Total Debts Servicing Ratio). This ratio should be lower than forty percent. However, if your ratio is higher, financial institutions might approve a lower percentage of financing. Liquid assets like mutual funds, GIC’s or stocks will also be considered to compensate for a high debt ratio. Credit rating and net worth will also be part of the picture. Showing a growing net worth on your balance sheet will demonstrate that you can accumulate assets. Therefore, you are financially mature enough to respect a mortgage contract and all other property expenses. Adding your spouse on the loan will also help out. Banks are more comfortable with more than one individual on the mortgage documents.

Negotiation

The mortgage industry is highly competitive. Therefore, it gives you the opportunity to negotiate several points on you loan. I would suggest you meet with two to three different institutions in addition to meeting a mortgage broker. They will offer different products, rates, terms and one might suits your interest more than the others. The mortgage broker will take your file and shop around for the best rate in town. That requires less effort and you might end up with a better rate than with your negotiation skills. As mentioned in my previous articles, consolidating all financial products with the same institution will give you better lending conditions. A good credit rating could also help to reduce the interest rate. In the end, it is really important that you understand different products offer by banks in order to select the kind of mortgage that suits you best.

The mortgage is probably the biggest loan you will ever sign for. Therefore, it is really important you understand every characteristics of each mortgages. You can negotiate the rate, the term and the amortization in order to get the best deal possible. In the end, you mortgage will bring you to your dream: ownership.

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